Interview of Interstate Bank President Igor Souvorov to Banks.am

Mr. Souvorov, earlier this February, the Interstate Bank, which you are President of, held a large-scale event in Armenia – an international forum dedicated to facilitating transactions in national currencies. What was the goal of the event? Why do the EAEU and the CIS member states aim to increase the volume of transactions in their national currencies?

Russian ruble has been the prevailing currency for payments related to the turnover of goods and services in recent years. But the ruble is mainly used in bilateral payments between Russia and other countries, while other transactions, not involving Russia, are still carried out in US dollars.

Expanding transaction volumes in national currencies will:

- reduce the share of payments made in US dollars, which is a currency beyond the control of our states. The dollar has become a rather uncomfortable currency for international settlements;
- reduce the cost of cross-border settlements, that can be carried out directly between participating countries, and bypassing third parties;
- protect exporters and importers from fluctuations of third-party currencies.

You might be tempted to think that nothing prevents the countries from using national currencies in payments for mutual trade. In practice, the use of a national currency in international transactions requires a number of conditions to be met. Here are some of those conditions:

- low currency risks and hedging costs for participants of foreign trade contracts;
- low conversion costs, in particular, due to a liquid market and direct quotes for national currencies;
- the ability to invest the incoming amounts in national currency in highly liquid, low-risk financial instruments nominated in that currency.

Given high volatility and certain narrowness of the markets in recent years, national currencies don’t fully meet these conditions, and that reduces attractiveness of the currencies.

For example, an Armenian importer pays to a Russian exporter in drams. The Russian exporter is not satisfied with this, because he cannot use this currency in Russia or anywhere else outside Armenia. As a result, the Russian company is forced to convert drams into rubles or dollars, bearing certain costs. So it is more profitable for the company to receive payments directly in dollars rather than in national currencies.

Analysts have shown that countries start using national currencies in bilateral settlements once they have established sustainable economic relations and have addressed macroeconomic stability issues. That is why the idea of our forum was to facilitate active discussions between the authorities, integration institutions, banks, exchanges and other companies to find specific solutions for developing transactions in national currencies. I am glad that the forum has sparked great interest in business communities of Armenia, Belarus, Kazakhstan and Russia.

What methods can encourage the use of national currencies?

Experts suggest various tools: developing correspondent relations between banks in the CIS countries, creating lending instruments and insurance against exchange risks, trading national currencies at forex markets, and so on.

The issue of expanding the use of national currencies, in my opinion, generally corresponds to states’ interests. But in reality, nothing is being done to address it. This will remain a problem until specific measures are taken. The EAEU and the CIS member states should actively support national currencies, in particular, to encourage execution of foreign trade contracts in national currencies so that producers and foreign trade participants could see the benefits of such transactions.

In my opinion, it is necessary to develop mutual trade between the CIS countries with the help of trade financing instruments in national currencies. Establishing a favorable environment for exporters and importers would help to enhance the use of national currencies in foreign trade contracts.

The limited use of national currencies in settlements also puts a constraint on mutual trade. The reasons are numerous: underdeveloped financial markets, high volatility of currencies, lack of liquidity and high conversion costs due to the lack of direct quotations between national currencies, and lack of hedging mechanisms.

What role does the Interstate Bank play in developing settlements in national currencies?

The Interstate Bank consistently follows a policy that promotes services in national currencies.

The Interstate Bank was the first international financial organization established by the CIS countries with a specific goal – to develop mutual settlements in national currencies. We have been working in this area for quite a while. The Bank was established in 1993, and our mechanism for cross-border settlements in national currencies (the settlement system) has been in operation for more than 15 years, based on the use of direct correspondent accounts with central banks and access to the national payment systems in the Republic of Armenia, the Republic of Belarus, the Republic of Kazakhstan, the Kyrgyz Republic, the Russian Federation and the Republic of Tajikistan.

The Interstate Bank provides banking services to the central (national) banks, integration institutions for the CIS and the EAEU, and enterprises and organizations engaged in foreign trade. The Interstate Bank also makes non-trade payments for money transfer systems and provides settlement services for interstate target programs running within the CIS. The Interstate Bank carries out settlement and foreign exchange transactions for its CIS clients and correspondents in Armenian drams, Belarusian rubles, Kazakh tenges, Kyrgyz soms, Moldovan leus, Russian rubles, Tajik somonis, Georgian laris, and other currencies. There are plans to open correspondent accounts in Uzbek soums.

The Bank offers national currency conversion services in the CIS interbank and exchange markets. The Interstate Bank was one of the few institutions engaged in developing the CIS Integrated FX Market, participating in the very first transactions involving national currency pairs at the Moscow Exchange. At present, the Interstate Bank participates in the foreign exchange sections of the Armenian Stock Exchange, Belarusian Currency and Stock Exchange, Kazakhstan Stock Exchange and the Moscow Exchange.

Our counterparties – central banks, international organizations and companies involved in foreign trade - highly appreciate the Interstate Bank’s capabilities.

The Interstate Bank was assigned a BB+ rating with a stable outlook by Fitch Ratings. The international ratings agency highlighted the Bank’s unique business model as a multilateral settlement institution operating within the CIS and EAEU.

The Bank has agreements with the governments and central (national) banks of the Republic of Armenia, the Republic of Belarus, the Kyrgyz Republic, the Russian Federation and the Republic of Tajikistan.

Our representative office in Armenia was opened in 1997. We also have representative offices in Belarus and the Kyrgyz Republic, and are planning to open an office in Kazakhstan.

The goal of the Interstate Bank’s activity at this stage is to facilitate the economic integration and development of the CIS and the EAEU national economies by participating in various internationally significant projects and developing transactions in national currencies.

What other instruments, besides settlements and conversions, could the Interstate Bank offer to facilitate the development of transactions in national currencies?

We are currently working to establish a fund to promote mutual trade in national currencies.

The fund will become an instrument for developing mutual trade using national currencies. We believe that financing provided by the fund will encourage participants to increase their transaction volume and add liquidity into the national currency market. At the same time, we will also be developing conversion transactions with national currencies. Another priority is to develop national financial markets, since free funds will be deposited in financial instruments in national currencies.

We are open to cooperation and ready to develop these lines of business.